{"id":93247,"date":"2025-03-07T19:01:34","date_gmt":"2025-03-07T22:01:34","guid":{"rendered":"https:\/\/murray.adv.br\/?p=93247"},"modified":"2025-03-07T19:01:37","modified_gmt":"2025-03-07T22:01:37","slug":"taxation-on-foreign-profits-could-cost-taxpayers-r142bn","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/taxation-on-foreign-profits-could-cost-taxpayers-r142bn\/","title":{"rendered":"Taxation on foreign profits could cost taxpayers R$142bn"},"content":{"rendered":"\n
The issue is on the Supreme Court\u2019s agenda; score so far is in favor of the National Treasury<\/em><\/strong><\/h6>\n\n\n\n

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03\/07\/2025 <\/p>\n\n\n\n

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The ongoing debate at Brazil\u2019s Federal Supreme Court (STF) regarding the taxation of profits from foreign subsidiary and affiliate companies could potentially result in a R$142.5 billion impact on Brazil\u2019s federal government if the ruling goes against it. This estimate, outlined in a technical note from the Brazilian Revenue Service, pertains to the reimbursement or loss of Business Income Tax (IRPJ) and Social Contribution over Net Profit (CSLL) revenues from 2017 to 2021. Additionally, the decision could reduce the National Treasury\u2019s annual revenue by R$28.5 billion moving forward.<\/p>\n\n\n\n

This calculation\u2014part of the Federal Revenue note (\u201cNota Cetad\/Coest No. 14 of 2023\u201d)\u2014was prepared at the request of the Attorney General\u2019s Office of the National Treasury (PGFN) and is based on data from the Central Bank concerning profits and dividends received abroad from direct investments between 2017 and 2021. The document notes that this estimate does not account for all affected taxpayers but rather a subset assumed to share a similar taxable situation.<\/p>\n\n\n\n

A survey by the law firm Trench Rossi Watanabe reveals that in addition to Vale\u2014which is involved in the STF case\u2014Petrobras, JBS, Ambev, and CSN are embroiled in similar multi-billion disputes. Collectively, these five multinational companies are challenging R$64.1 billion in assessments from the Brazilian Revenue Service: R$22.2 billion from Vale, R$20.6 billion from Petrobras, R$11.3 billion from JBS, R$5.8 billion from CSN, and R$4.4 billion from Ambev. The survey was based on the most recent reference forms disclosed by these companies.<\/p>\n\n\n\n

The issue resurfaced on the STF\u2019s agenda in early February, but the analysis was postponed following Justice Nunes Marques\u2019s request for more time. It may resume in May, with a new opinion expected within 90 days. The justices are evaluating the validity of applying IRPJ and CSLL on domestic companies\u2019 profits from affiliates in countries with treaties with Brazil to avoid double taxation. Currently, 38 such agreements are in place.<\/p>\n\n\n\n

Lawyers indicate that the Superior Court of Justice (STJ) precedent is more favorable to taxpayers, recognizing the supremacy of international treaties over Brazilian domestic law. However, at the STF, the government currently leads two votes to one. According to Lana Borges, Deputy Attorney General for Court Representation of the PGFN, the STJ did not adhere to STF precedents on this matter.<\/p>\n\n\n\n

Most multinational companies\u2019 cases remain in the administrative phase, and their liabilities are not provisioned since losses are deemed possible, based on STJ precedents. The issue is contentious and typically resolved by the tiebreaking vote of the president of the Administrative Council of Tax Appeals (CARF), who represents the National Treasury.<\/p>\n\n\n\n

The tax authority argues it is not taxing the profits of the foreign subsidiaries but rather those of the Brazilian parent company, which reflect the foreign entities\u2019 accounting results via the equity method (MEP).<\/p>\n\n\n\n

The method aims to assess the value of an investment when a company holds a stake in another. Through it, the investment is initially recognized at cost and then adjusted to reflect the invested company\u2019s results, proportionate to the investing company\u2019s stake.<\/p>\n\n\n\n

This methodology is outlined in the Brazilian Corporate Law (No. 6.404\/76) and was later incorporated into tax law by Article 74 of the provisional presidential decree No. 2158\/2001. The provision states that \u201cprofits obtained by a foreign subsidiary or affiliate will be considered available to the Brazilian parent or affiliate company on the date of the financial statements in which they were accounted for, as per regulations.\u201d<\/p>\n\n\n\n

Petrobras faces the most cases on the matter, with five in court. Four have already resulted in unfavorable decisions. In the remaining case, Petrobras won at the appellate level, but the PGFN\u2019s appeal is pending. Ambev has four cases, but only one is in court, still in the expert phase.<\/p>\n\n\n\n

CSN is contesting four cases before the Administrative Council of Tax Appeals (CARF), with no victories, and one in court. A favorable ruling was made, but the PGFN appealed to the Federal Regional Court of the 6th Region (TRF-6). JBS has faced several tax deficiency notices between 2006 and 2018, and all discussions remain in the administrative realm.<\/p>\n\n\n\n

In its explanatory notes, Vale states it has faced multiple deficiency notices for years 1996 to 2008. The dispute for 1996 to 2002 had a R$2.3 billion impact, but it received a final favorable decision. From 2003 to 2012, the impact stands at R$22.2 billion. The company also reports it has entered a payment plan, with a remaining balance of R$10 billion to be paid in 58 installments.<\/p>\n\n\n\n

While Vale\u2019s case does not have general repercussions, it will serve as a significant precedent\u2014being the first and only case to reach the STF. The court has not yet thoroughly analyzed the matter concerning treaty precedence. A key precedent dates back to 2013 when Article 74 of presidential decree 2158\/2001 was validated for affiliate companies in tax havens or favorable tax regimes (ADI 2588).<\/p>\n\n\n\n

The current judgment will determine whether the rule applies to foreign companies in countries with which Brazil has a double taxation treaty. Vale is challenging the \u201cautomatic taxation\u201d of IRPJ and CSLL on profits earned by subsidiaries in Belgium, Denmark, Luxembourg, and Bermuda.<\/p>\n\n\n\n

So far, Justices Gilmar Mendes and Alexandre de Moraes have sided with the PGFN, contending that treaties do not preclude taxation in Brazil. The rapporteur, Justice Andr\u00e9 Mendon\u00e7a, deemed the issue non-constitutional but stated he would support Vale if overruled on that point.<\/p>\n\n\n\n

Initial and appellate court rulings favored the federal government, but the STJ partially reversed this, maintaining the charge only for Bermuda, as there is no bilateral agreement with Brazil and it is considered a tax haven.<\/p>\n\n\n\n

Simone Dias Musa, a partner at Trench Rossi Watanabe, believes there are chances for a taxpayer victory. She argues that the Treasury\u2019s stance that the equity method inherently presents an economic or legal availability for taxpayers is flawed. \u201cThe equity method thesis claims that the profit accounted for in Brazil from foreign affiliates allows for taxation. However, treaties to prevent double taxation should preclude Brazil\u2019s jurisdiction from taxing profit earned by a foreign-based company,\u201d she states.<\/p>\n\n\n\n

The equity method, she explains, is an accounting method to prevent a Brazilian parent company\u2019s balance sheet from reflecting the group\u2019s profit. \u201cIt does not represent standalone profit,\u201d she says. \u201cIt is an accounting reflection of a profit generated by a foreign company, so the double taxation treaty is perfectly suited to prevent taxation in Brazil until it is distributed.\u201d<\/p>\n\n\n\n

However, Deputy Attorney General Lana Borges asserts that the profit does not have to be repatriated to be taxed. \u201cIt is already within the parent company\u2019s assets,\u201d she claims. Ms. Borges views it as a matter of fiscal fairness. \u201cA Brazilian company with no foreign affiliates pays taxes once its profits are accounted for, not when they are distributed. Should a parent company with foreign subsidiaries not pay taxes?\u201d<\/p>\n\n\n\n

Ms. Borges also argues that there is no reason to invoke treaty-based double taxation relief, as there is no tax on profits generated abroad. \u201cTypically, the parent company pays the tax. Being in Brazil, the Brazilian law applies, so there is no double taxation,\u201d she explains.<\/p>\n\n\n\n

She notes that Brazilian legislation provides mechanisms for the parent company to deduct any taxes paid on the same profits abroad by the subsidiary\u2014such as Article 26 of Law No. 9.249\/1995 and, later, Article 87 of Law No. 12.973\/2014.<\/p>\n\n\n\n

Tax lawyer Tel\u00edrio Saraiva, also a partner at Trench law firm, emphasizes that the STJ has ruled in favor of treaty precedence. \u201cBrazil must honor its commitments with other nations,\u201d he states. He disagrees with the votes of Justices Mendes and Moraes, who argue that Brazilian taxation aligns with OECD principles. \u201cOECD only permits double taxation in cases of abusive tax planning,\u201d he argues, noting the significant impact of the thesis on multinationals\u201434% on profits from foreign subsidiaries.<\/p>\n\n\n\n

Tax attorney Eduardo Pugliese, a partner at Schneider Pugliese Advogados, claims that the Revenue Service seeks to tax foreign subsidiaries\u2019 profits automatically. \u201cIt won\u2019t wait for a foreign company to remit the funds to Brazil and intends to tax the profit as soon as it is realized abroad as if it were an automatic availability,\u201d he says.<\/p>\n\n\n\n

In a statement, CSN asserts that international treaty rules hierarchically supersede domestic universal taxation rules. \u201cTherefore, international tax law rules prevail over ordinary domestic legislation,\u201d the company states, citing STJ rulings.<\/p>\n\n\n\n

Vale, JBS, and Ambev declined to comment on the matter. Petrobras did not respond immediately.<\/p>\n\n\n\n

*By\u00a0Marcela Villar\u00a0\u2014 S\u00e3o Paulo<\/p>\n\n\n\n

Source: Valor International<\/p>\n\n\n\n

\nhttps:\/\/valorinternational.globo.com\/\n<\/div><\/figure>\n","protected":false},"excerpt":{"rendered":"

The issue is on the Supreme Court\u2019s agenda; score so far is in favor of the National Treasury 03\/07\/2025 The ongoing debate at Brazil\u2019s Federal Supreme Court (STF) regarding the taxation of profits from foreign subsidiary and affiliate companies could potentially result in a R$142.5 billion impact on Brazil\u2019s federal government if the ruling goes […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8106],"tags":[25936],"class_list":["post-93247","post","type-post","status-publish","format-standard","hentry","category-murray-news","tag-taxation-on-foreign-profits"],"yoast_head":"\nTaxation on foreign profits could cost taxpayers R$142bn - Murray Advogados<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/murray.adv.br\/en\/taxation-on-foreign-profits-could-cost-taxpayers-r142bn\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Taxation on foreign profits could cost taxpayers R$142bn - Murray Advogados\" \/>\n<meta property=\"og:description\" content=\"The issue is on the Supreme Court\u2019s agenda; 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